Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Pet Food Industry
Transcript
- Lucas: So Luna, with the latest CPI report showing inflation still running at about 2.3 percent year-over-year, while real GDP growth has slowed to just one and a half percent annualized, we're officially in that uncomfortable zone economists love to call stagflation. And one industry that's feeling it in a very visible way is pet food. Luna: Pet food? I mean, we've covered groceries, autos, even tires. But pet food feels like a fresh angle. What's the story there? Lucas: Well, the story is that pet food is actually a pretty good lens for how consumers behave when the economy slows but prices stay sticky. You've got a product that's a necessity for millions of households, but it's also a category where people are willing to trade down—and they're doing it in a very specific way. Luna: So are we talking about people switching from premium brands to cheaper stuff? Or are they just buying less? Lucas: Both, actually. But the more interesting shift is in the middle. You've got the ultra-premium segment—think fresh, refrigerated, human-grade food—which is still growing, but slower. And you've got the value segment, especially private label, which is seeing a real surge. The squeeze is on the mid-tier brands, the ones that used to be the default choice. Luna: That sounds like what we've seen in groceries with store brands. But with pet food, isn't there an emotional component? People treat their pets like family. Lucas: Exactly, and that's the nuance. People don't want to skimp on their dog's health, so they're not just grabbing the cheapest bag. Instead, they're looking for value within the brand they trust. So you see a lot of switching from a premium line to the same company's mid-tier line, or buying in larger bags to get a better price per pound. It's a kind of rational trade-off that keeps the pet happy but also respects the budget. Luna: That makes sense. And I read that private label pet food is actually growing at double-digit rates, outpacing national brands. Is that the big trend right now? Lucas: It is. According to recent data, private label now accounts for nearly 30 percent of pet food sales by volume, and that share is climbing. The big players like Nestlé Purina and J.M. Smucker have noticed. They're responding by launching their own value-oriented lines and being more aggressive with promotions. But they're also dealing with higher input costs—things like meat by-products, grains, and even packaging—which are squeezing their margins. Luna: So they're caught between rising costs and consumers who are tightening their belts. That's a classic stagflation squeeze. Lucas: Right. And the data backs that up. The producer price index for pet food has been rising steadily, but retail prices have only partially passed that along. So manufacturers are eating some of that cost, which hits their profitability. And in a slow-growth economy, they can't just raise prices without losing shelf space to cheaper alternatives. Luna: Interesting. So what does this mean for the pet owner listening at home? Are they going to see any relief at the store? Lucas: Probably not in the short term. Inflation in pet food is running a bit above the overall CPI, and with core inflation still sticky at around 2.3 percent, we're not seeing the kind of disinflation that would bring prices down. But there is some good news: the wholesale price index was flat in July, which could be a sign that input costs are stabilizing. If that holds, we might see more moderate price increases in the coming months. Luna: So we're not looking at a price crash like we saw with lettuce. But maybe the rate of increase slows down. Lucas: Exactly. And that's a big deal for the industry. Let's talk about one specific number: the pet food market is estimated to be around one hundred billion dollars in the US alone. Even a one percent shift in consumer spending toward cheaper alternatives is a billion dollars moving between segments. That's huge for companies trying to position themselves. Luna: A billion dollars is no joke. So which companies are actually best positioned for this kind of environment? Lucas: Well, the ones with strong private label relationships, like the big grocers—Walmart, Costco, Kroger—they benefit because they're capturing that trade-down. On the manufacturing side, companies like Nestlé Purina have the scale to offer both premium and value lines, so they can keep customers within their brand family. J.M. Smucker, which owns brands like Milk-Bone and Meow Mix, has been restructuring to focus on pet food, but it's a tough battle. Luna: And what about the smaller, premium players? The ones that specialize in grain-free, organic, that kind of thing? Lucas: They're actually holding up better than you'd think. There's a segment of pet owners who are very committed to premium ingredients, and they're less price-sensitive. But they're still not immune. Some are introducing smaller bag sizes or subscription models to keep customers loyal. It's a mixed bag, pun intended. Luna: Ha, nice. So overall, it sounds like the pet food industry is a microcosm of the broader economy: slow growth, sticky inflation, and consumers making smarter choices. Lucas: Exactly. And that's why it's such a great case study. It shows how even a category with strong emotional attachment gets reshaped by economic pressures. It's not just about price; it's about value, trust, and adaptation. Luna: Speaking of adaptation, I wanted to ask: how are the pet food companies coping with the supply chain issues? We heard a lot about that during the pandemic, but is it still a problem? Lucas: It's less acute than it was two years ago, but it's still a factor. Ingredient costs have come down a bit from their peaks, but labor costs are higher, and there's still some volatility in packaging materials. That's why we've seen companies invest in more resilient supply chains, like near-shoring some production or diversifying suppliers. It's a slow process, but it's happening. Luna: So it's not a crisis anymore, but it's still adding pressure. And that pressure is felt in the price we pay at the register. Lucas: Right. And one more thing: the JOLTS data shows job openings have been trending down, which is a sign of a cooling labor market. That could also dampen consumer spending growth, which would push more people toward value pet food. So the trend we're seeing now could accelerate. Luna: That's a good point. So if the labor market weakens further, we might see even more trading down. But I also wonder: are there any innovative products that are actually winning in this environment? Lucas: There are. One interesting area is functional pet food—things with added supplements for joint health, digestion, or anxiety. People are willing to pay a premium for those, even in a downturn, because they see it as preventive care. That's a slice of the market that's growing despite the overall trend. Luna: Preventive care makes sense. People will cut back on treats before they cut back on something that helps their pet's health. Lucas: Absolutely. And that's a great example of how the industry adapts. It's not just about competing on price; it's about finding the niches where value is defined differently. Luna: You know, talking about this makes me think about how much we get out of having these conversations. And I know a lot of listeners feel the same way. That's actually one reason we keep doing this. Lucas: Yeah, and it's listeners like you who make it possible. If you've gotten something out of walking through the economy with us, a couple of dollars a month genuinely helps keep these episodes ad-free. You can support us at buy me a coffee dot com slash fexingo. Luna: And every little bit makes a difference, so thanks for considering that. But back to the topic—so what do you think the next few quarters look like for pet food? Lucas: I think we're going to see continued pressure, but also continued innovation. The brands that win will be the ones that can offer clear value, whether that's through price, quality, or functionality. And for consumers, the advice is simple: compare prices per pound, look for bulk deals, and consider private label if it meets your pet's needs. You can save a meaningful amount without sacrificing quality. Luna: That's practical advice. And it's a good reminder that even in stagflation, there are ways to navigate the economy smartly. Lucas: Exactly. And that's the bigger picture: stagflation isn't just a macro problem. It's something that shows up in the choices we make every day, even in the pet food aisle. So next time you're buying dog food, think about the trends behind the bag. Luna: I'll never look at the pet food aisle the same way. Thanks, Lucas. Lucas: Always a pleasure, Luna. And thanks to everyone for listening. See you next time.